Groupe Casino is a French multinational company that operates more than 9,000 multi-format retail stores—hypermarkets, supermarkets, discount stores, convenience stores, and restaurants—throughout the world. To January 2005, Casino issued €600 million of undated deeply subordinated fixed-to-CMS-floating-rate notes at a price of 101. The offering circular described certain aspects of the notes as follows:
Deeply Subordinated Obligations
The Notes are deeply subordinated obligations of the Issuer and are the most junior debt instruments of the Issuer, subordinated to and ranking behind the claims of all other unsubordinated and subordinated creditors of the Issuer.
Undated Securities
The Notes are undated securities, with no specified maturity date. The Issuer is under no obligation to redeem the Notes at any time. The Note holders have no right to require redemption of the Notes, except if a judgment is issued for the judicial liquidation (liquidation judiciaries) of the Issuer or, following an order of redressement judiciaire, the sale of the whole of the business (cession totale de l’enterprise) of the Issuer, or in the event of the voluntary dissolution of the Issuer or if the Issuer is liquidated for any other reason.
Interest Interruption
The Issuer has the option to decide not to pay interest on the Notes on any interest Payment Date if, during the 12-months period preceding such Interest Payment Date, it has not paid or declared any dividend on its Equity Securities and provided it has not made, during any such period, any payments on (including inter alia by way of redemption, purchase or redemption of) any Equity Securities. The interest payment provisions of the Notes are non-cumulative. Accordingly, any interest not paid on the Notes as a result of the valid exercise by the Issuer of such option will be forfeited and accordingly will no longer be due and payable by the Issuer.

Required:
1. Casino management intends to treat the notes as equity instruments for financial reporting purposes in accordance with International Financial Reporting Standards (1ERS). What specific IFRS guidance helps accountants and auditors distinguish between liabilities and equities?
2. Do you concur with management’s decision to treat the notes as equity instruments? Why?
3. Suppose the notes are issued on January 1, 2005, that the first year’s interest rate is 5%, and that interest is paid on December 31 of each year, Prepare the journal entries Casino would use to record (a) issuance of the notes on January 1, 2005, (b) interest expense for the year, and (c) the cash interest payment on December 31, 2005. Income tax considerations may be ignored. Use an 8% interest rate for these journal entries.
4. The notes were issued at a price of 101, which is a slight premium over the face value. What “red flags” does this issue price raise?